What are nominal codes? A UK guide for bills

What is a nominal code?

A nominal code is the number or short code of one account in your general ledger, such as sales, rent, printing or bank charges. Every line you post gets one. When a supplier bill comes in, the nominal code says which cost the line belongs to, so it lands in the right row of your profit and loss report.

The full list of these accounts is your chart of accounts. Think of the chart as the menu and the nominal code as the item number you order by. The record of everything posted to each account is the nominal ledger, which is another name for the general ledger.

What do Xero, QuickBooks Online and FreeAgent call them?

The three packages use different words, which matters when you switch between them.

In Xero, each account has a code of up to 10 characters. You can use any code as long as it is unique, and Xero suggests checking whether your accountant has a preferred set (Xero Central). In QuickBooks Online, account numbers are off by default. You switch them on with Enable account numbers under Settings, Account and settings, Advanced, and QuickBooks says they are not required (QuickBooks help). FreeAgent's own terminology page says your accountant might call its accounting categories nominal accounts or nominal codes (FreeAgent support).

So "nominal code" is UK accountant speak. The thing you pick on a bill in each package is an account, category or code from the same idea.

How does a chart of accounts fit together?

Every account has a type, and the type decides where it appears in reports. Xero groups its types into assets, liabilities, expenses, equity and revenue. QuickBooks Online uses the same broad split, and its account type and detail type decide whether an account shows on the Balance Sheet or the Profit and Loss (Xero Central; QuickBooks help).

Xero also gives each account a default tax rate, so choosing the account often pre-fills the VAT treatment on the line. You still check it against the invoice.

If you are setting up a new ledger, start from the default chart the software gives you and add accounts only when a report needs the split. Xero, for example, recommends no more than 699 accounts (Xero Central). A shorter chart is easier to code consistently.

How do I choose a nominal code for a supplier bill?

Ask what the money bought, not who the supplier is. Then work through these steps:

1. Read the line description, not just the supplier name. A stationery supplier may also invoice for a laptop.
2. Decide whether it is a running cost (expense), something you resell (cost of sales) or something you keep for years (asset).
3. Pick the most specific account that already exists. Do not create a new account for a single bill.
4. Check the tax rate on the line matches the invoice, especially for zero-rated or mixed lines.
5. Use the same account next time this supplier bills you for the same thing.

Worked example (numbers are illustrative): a bill from a print shop for £240 of business cards plus £48 VAT, £288 in total. The line is a running cost, so it goes to your printing and stationery account, at the standard 20% rate. If the same invoice also had a £60 poster for the shop window, you might split it to an advertising account instead. That is two lines, two accounts, one bill. Our guide to line items versus totals covers when the extra detail is worth it.

Mistakes to watch for: coding a laptop to office costs so it never reaches the fixed asset register, and using a "miscellaneous" account so often that the report says nothing. Xero treats a purchase coded to a Fixed Asset account as a draft fixed asset, so the account choice changes what happens next (Xero Central).

Are item or inventory codes the same as nominal codes?

No. A ledger account is where the amount is posted. An item, product or inventory code identifies something you buy or sell, and it may carry a default account, but it is not one.

Customers often hit this when they treat a supplier's product code as if it were an account. If you do not keep stock, a product code from a supplier is a description, not a ledger account. Code the line to an expense or cost of sales account and keep the product code in the description.

Xero shows where the line is drawn. Tracked inventory items use an account of type Inventory, which Xero manages for stock on hand. When you buy a tracked item, the inventory asset account appears in the Purchase account field and you cannot select another. Xero also warns that an account type cannot be changed to Inventory afterwards, so you create a new account of that type (Xero Central; Add, edit or delete an account). If you do not track stock, code the line to a normal expense or cost of sales account.

QuickBooks Online has a related choice on bills, between category details and item details. That has its own article: QuickBooks Online category details vs item details. FreeAgent keeps stock items separate from accounting categories too (FreeAgent support).

How can I stop coding the same supplier by hand?

Recurring bills are where inconsistency creeps in. A simple habit helps: keep a written coding list with the account and tax rate you expect for each regular supplier, and check new bills against it.

If you capture bills in Datamolino first, saved coding rules cover this step. You save supplier coding per folder as a default, and description matches and keyword rules apply to line items. You review and change the coding whenever needed, then export the bill to Xero, QuickBooks Online or FreeAgent. The guide on finishing coding after approval shows where that sits in the workflow. Practices with many clients can read the accountants and bookkeepers page.

Why is a bill coded to an inventory account a problem?

Inventory accounts are set up for tracked stock items, not ordinary bill lines. If you do not track stock, code the line to an expense or cost of sales account and keep the supplier's product code in the description.